W1 Introduction to FM Flashcards
what are the 3 key elements of the Australian financial system?
Financial instruments
Financial markets
Financial institutions
what are the functions of the financial system?
- to facilitate the transfer of funds from surplus economic units to deficit economic units, by the creation of new financial assets
- to facilitate the trade of existing financial assets
list the 5 components of the financial system
- surplus economic units
- deficit economic units
- financial institutions
- financial assets
- financial markets
what is a surplus economic unit?
individuals, households and companies with more funds than required for immediate expenditure
an economic unit with income that is greater than or equal to expenditures on consumption over the course of a period (investopedia)
> savers
potential lenders
what is a deficit economic unit?
individuals, households and companies who require additional funds to meet expenditure plans
used to describe how an economic group has spent more than it has earned over a specified measurement period (investopedia)
> potential borrowers
what is a financial institution (FI)?
are organisations whose core business involves (1) borrowing and lending (financial intermediation) and (2) provision of financial services, e.g. advisory and or transactional.
is a company engaged in the business of dealing with financial and monetary transactions such as deposits, loans, investments, and currency exchange (Investopedia)
what is a financial asset / financial instrument?
(1) are issued by a deficit economic unit., and (2) acknowledge a financial commitment and entitle the holder to specified future cash flows
is a real or virtual document representing a legal agreement involving any kind of monetary value that provides an efficient flow and transfer of capital all throughout the world’s investors (Investopedia)
what is a financial system?
Is a system that enables lenders and borrowers to exchange funds.
Covers financial transactions and the exchange of money between investors, lender and borrowers.
list the 4 types of financial assets
- debt
- equity
- hybrid
- derivatives
define what a debt financial asset is and provide four examples of them
represents an obligation on the part of the borrower to repay principal and interest
- deposits and loans
- contractional savings
- discount securities
- fixed interest securities
define what an equity financial asset is and provide an example of one
represents an ownership claim over the profits and assets of a business
- oridnary shares
define what a hybrid financial asset is and provide two examples of them
financial assets which have features of both debt and equity
- preference shares
- convertible notes (bonds)
define derivatives and provide a few examples of them
derivatives are assets whose value is derived from another financial asset, rate or index
- forward contracts
- futures
- options
- swaps
when considering investment options, what are the four attributes of financial assets that an investor must consider?
- return vs risk
- liquidity
- time pattern of the cash flows
- portfolio structures
explain the Return vs Risk attribute of financial assets
return - is the gain or loss of an investment over a specified period, expressed as a % increase over the initial investment cost**
** gains/losses on investments = periodic income received from the security + realized capital gains/losses
risk - chance that an investment’s actual return will be different than expected
> always a trade-off b/w risk and return
